Yair lapid, the finance minister of israel. We talk about Foreign Policy and domestic policy. We will within all the wheeling and dealing of creating the coalition, there are hundreds of rumors flying by am people saying that does he want this does he want that, does he want that. And that was conflicting, i have to admit. And then there was a moment in which i was negotiating with myself instead of someone else am i said okay, why did you go into politics. I mean i think, i dont know that, i think i could be an okay foreign minister. But i went into politics talking about the and saying im there to improve the life of the israeli middle class. You dont do this as a foreign minister it dow this as finance minister. Deadlock in washington and the finance minister of israel when we continue it from our studios in new york city this is charlie rose captioning sponsored by Rose Communications from our studios in new york city, this is charlie rose. The president s refusal to negotiate is hurting our economy and putting our country at risk. This morning a senior white house official said that the presidt would rather default than to sit down and negotiate. Really . Rose it is day 7 of the u. S. Government shutdown. Tensions are rising between democrats and republicans as both sides accuse the other of intransigence. President obama speaking today during a visit to fema headquarters called on john bayne tore end the shutdown. Right now congress should do what is in the best interests of the economy, and the american people. And thats move beyond this manufactured crisis and Work Together to focus on growth, jobs, and providing the Vital Services that americans all across the country depend on. Rose markets today reacted it to the contingent shutdown with unease worried that the stalemate could prevent extension of the debt limit with dangerous consequences. To take a closer look at the economic fallout Austan Goolsbee joins us from chicago, a professor of economics from the booth school of business, previously chairman of president o billiona council of the economic advisors and peter orszag. Martin feldstein is also here, he is a professor of economics at harvard and formerly president reagans chief economic advisor. I am pleased to have all of them here. So here we are. We have a president who says im to the going to negotiate, even with respect to the debt ceiling, especially with respect to the debt ceiling. We have a speaker of the house sayin im to the going to bring to the floor a continuing resolution that doesnt involve my own strong feelingses about health care and entitlement reform. So one wont bring anything to the floor. One wont negotiate. How do we get this thing settled . You want pie guess of how it ends. Rose yes, sir. I think they will agree to negotiate. That otherwise nothing is going to happen. And i think they will agree to negotiate perhaps about smaller things than mr. Boehner and some of his colleagues want. But they will agree to negotiate something about the spending side of the budget. Rose you mean perhaps entitlement reform, those types of things. That would be wonderful. But it maybe the kind of thing that the president had suggested earlier, about changing the indexing of Social Security. It would be an entitlement reform. Rose so people are going to compromise where they are now and find some levels of agreement for temporary well, it that will be more than temporary. That would be a permanent slowing of the growth of the Social Security spending. Rose what do you think of that . Not going happen. Rose why not . First of all t would be desirable if it would but its not going to. Because i think at this point the white house has made it clear that they view thises a repeated game or repeated thing that, you know, every year or so were going to have these kinds of issues. And that if they said they werent going to negotiate and start negotiating what happens next year or the year thereafter or the year thereafter. So i think the way out of this is likely to be a relatively clean ending bill and clean debt limit, perhaps coupled with a figure leaf of a process. So you know, a tax reform process. Or an entitlement reform process but no actual legislation that does anything today. Rose okay, but you assume that therefore the speaker of the house will bring to the floor something that will put together enough republican votes and democratic votes to pass it, even though will not get, say, the 20 to 30 people who have been holding up everything in his caucus. I think despite what he said, Speaker Boehner said over the weekend, he could bring a clean debt limit bill to the floor today and it would pass. Rose austan what do you think. How is this thing going to, without its i way through . Well, you know, my wife, your carolina connection, will you appreciate, my wife refuses, she always asked me why do you watch the basketball game. Its always going to come down to the last 30 seconds anyway and it will take them an hour to shoot the free throws to figure out who the winner is. I think that is happening here. Were going to come to e last minute. I actually think that the most likely thing to happen is they just punt it for six weeks and they say well, you know, maybe well start negotiating. Were to the going to do anything and so well just put it off and so we can all look forward to just doing this again in a month or two months. I think the root of the problem is both side its came with a little uncertainty, ultimately who does america really side with. And from the first poll it has looked from the very first poll its looked like republicans were on the short end of this stick. But i dont quite think that that has moved very much. And its still the case that a lot of ode people who arent following it that closely dont understand what the debt limb result is and they say well, i cant raise my credit card limitment so maybe you should make the fight about the debt limit. And until somebody really starts losing in public opinion, in really starts moving against them from where it was at the start of this, i think theyre just going to sit there and wait. Rose and how long can they wait without doing damage to the economy . Well, there is damage and then theres damage. I think its doing some damage. But the damage that its doing is relatively moderate. If they literal ledefaulted on the bonds, it would be catastrophic collapse. If they tried to do some pry priorization of payments as the republicans call it where they would promise to pay the bondholders but then start issuing, i dont know, ious or delays on Social Security or somethinging i think that wob pretty devastating to the economy. I think youd see a collapse of Consumer Confidence as well as some pretty significant immediate negative impacts. The things thats changed is the country has grown more polarized. The last time we had a shutdown thereere almost 80 republican was came from districts that bill clinton carried. Today there are under 20 that come from districts that barack obama carried. Fundamentally different. So to austans point about who gets punished, if you are from a deeply conservative red district. Rose redistricting. And its actually, the Political Science literature suggests that redistricting is a little part of it. There are Underlying Forces ongerry manned aring. The point is if you come from that kind of district and holding frl to your principleses you are not getting punished and the same from the other side. You have this this pulling apart. The middle is getting a lonely place to bement and it makes these kinds of things much more dangerous. I think theres an awful lot of foolish talk about defaulting on the debt. And the fact that we hit the debt ceiling and thats going to mean not paying the interest on the debt, not paying Social Security, thats very dangerous stuff to say. And its not going to happen. If we hit the debt ceiling. Rose so people who say look, if we have to default wehave to default, are just simply not recognizing reality of what it would mean. Exactly. If we get to the debt ceiling, and the government doesnt have the right to borrow more, we still collect taxes. The government still collects taxes. Enough taxes to pay the interest on the debt, to pay the Social Security benefits and to pay other things. Cant pay for everything but it can certainly avoid defaulting on the debt. It can certainly avoid not paying Social Security checks. And so thats going to happen. And i think i dont know. You have to be a little careful with that. Because the money comes in but its 30 to 40 , the burn rate is 30 to 40 above what the money would go out on. Treasury has always held to the position that they are not allowed or they are not able to prioritize who would get paid. Nobody has obvious seniority. If they decided hey, were going to pay Social Security, were going to pay interest on the debt, then they cant pay the military. Or some major, Major Economic and social impact thing is to the going to be paid. Thats just the reality. I think theres no question that we will pay the interest on the debt. That they have the technical ability to say those accounts are going to be paid. Thats a contractual obligation, to delay paying others, thats something that wouldnt be a good thing for the economy. The treasury secretary says not possible. To the on that but, you know, there is a limited ability to do that. If were starting to issue script to you know military providers and to medicare, to hospitals and what have you, it can at most that can go on for a short period of time. By the way, if you are a bond hold are and that is happening you can be nervous anyway it is not like that is a perfect solution. If you were the head of management budget, and so you had some responsibility for this, and you must have thought about whether in fact mechanically you could pay the interest on the debt and whether mechanically you could pay Social Security. Its much because the systems are different, if one were to go down this path, and im not saying that this is a desirable path to go down. But the system that pays Debt Services different from the system that kind pays everything else. Social security is a lot harder to take out relative to medicare payments and other payments. So pulling out Social Security beneficiaries is harder than just debt service payments. So youre saying you could pay the you know you wouldnt like it, it wouldnt be good. I. Rose go ahead. That seems plausible. Some major, major group, either the military or payments to Nursing Homes or to the sick, i mean somebody has to not be paid or to be given ious or delayed payments. I mean its going to be massively, massively disruptive. Even if they figured out a way to pay the debt holders and Social Security, there would be hundreds of billions of dollars of people not being paid. Right, and bestcase scenario even if that were feasible that enough to throw the economy back in recession at that point. So that the bestcase scenario and it could be much worse than that. Rose and what is the impact of the credibility of the American Financial system and the devastating effect, would be called default, at least by some, would have in the eyes of the world and markets . If we actually didnt pay the interest on the debt, that would have a disastrous effect on our credibility and our ability and on the Interest Rates that we pay going forward. And thats a further reason why im sure that if we actually ran into the limits, the treasury would find a way to make sure that all those Interest Payments get paid. And then the contractors, the hospitals, the universities and others would understand that for a matter of weeks, they wont get benefits. They wont get the cash on time. You know, you teach at harvard and you served in government. And you know are you amazed were having this conversation about the possibility of default . Amazed . Well, of default, yes. Because i think its a nonissue. I think it wouldnt happen. Im also amazed that were having this conversation about running into the debt ceiling and not being able to deal with it. But i think default as such is a scare tactic. Are you amazed that 20 to 30 members of one party can seem to be holding a process hostage and what do you think that says, a for th political process . I think it as unusual. We havent seen anything like this before. I think you know, i served as you said in the reagan administration. President reagan was a negotiator. Rose and negotiated debt ceilings, and said to hold them in hostage was but he negotiated. We. So thats the point. I mean he negotiated with tip oneill. Rose austan why shouldnt the president negotiate. And do you believe in the end he will . I kind of dont on the debt ceiling i done think hes going to negotiate. And i think what the complication that happened here over the previous three months were most republicans were saying things that were along the lines of what marty said there, of lets make this about the size of Government Spending or lets try to turn it to be about entitlements. And then there was a deliberate effort to steer the truck on to the side road which is lets make this all a fight about forcing the president to give up obamacare or to delay obama care for a year. Will not do that. That will not work. And they perceive quite correctly that if you had oneyear delay in obamacare than in 1 year well be in the same fight and theyll say lets delay obamacare for another year. So they view this as lets have the fight now. s going to just keep having this fight over and over, lets have it about this. And i think now were going to have a hard time trying to put if back on to, well, lets make it about the size of the budget or about enfight elments. Rose i you have heard people argue even this past weekend, you know, about that the deficit is not the real issue. That growth is the issue. Where do you come down on that . Austan . Before you go, i know you have to go. Yeah, okay, im going to cut out. Look, i think for sure growth is the issue. I mean you may have seen the poll just came out today from bloomberg where they asked people, do you think the deficit is getting bigger or smaller. In fact, the deficit is shrink at the fastest rate ever, even as fast or faster than at the end of world war ii. But youve got almost twothirds of people who think the deficit is going up. So i think in the short run, what we should be mainly focused on is how do we get the Growth Engine back going and you know, we can have a debate about that. There are a lot of different views but for sure in the short to medium run that is the overwhelmingly most important thing, not the how do we get the deficit to shrink faster. Rose what do you think about that argument, that austan just made, the deficit is shrinking. The deficit is shrinking temporarily. The debt is as a share of gdp is down. But the absolute size of the debt as opposed to the deficit, the total amount that the government owes is not shrinking. Its growing. But the key thing. Rose what percentage of gdp is about now. About 73 . Rose what do you think about all of this. I think austan is right that the deficit is coming down, for three reasons. One is the economy is recovering. The second is there was a bunch of temporary things that were done, the stimulus bill, for example. That on purpose were designed to fade as the economy started to recover. And then finally and most importantly, healthcare costs have decelerated dramatically. The Congressional Budget Office has taken micare and medicaid costs for the next decade and marked them down by 1. 2 trillion because healthcare costs are growing so slowly and they expect that to continue. That is by far the most important thing that we could invest in in order to maintain a sustainable or to get back on to a sustainable longterm fiscal path. The problem with growth as a solution to this impasse, to this impasse is you cant just do it. You cant see it. I takes time. So we could think of a number of policies that would help. But the only thing that you could imagine coming out of a congressional president ial negotiation is about the deficit, about entitlement spending, ask about stuff like that which are concrete, measurable in the short run. By the way, in the meanwhile i think there is plenty that we could be doing to try to, if you are worried about the deficit as opposed to growth, and we need to be worried about both. But if you were worried about the deficit even in the absence of legislation, i again returning to the Health Sector where the most important piece of our longterm fiscal imbalance arises. Rose right. You could be doing a lot more to encourage the shift away from feeforservice payment and towards alternative payments even without new legislation. And we should be doing that. Because give then polarization in the congress, its not likely in my mind that were going to have any major pieces of legislation. Rose why is it so hard to have, in a sense, is it simply negotiations the reason that people have not been more frank about what they would consider in tms of reforming entitlements, in terms of revenue enhancement and all of that, you know, in terms of what you would trade, in terms of taxes for elimination of deductions and that kind of thing . I think the basic problem here is frankly democracies dont deal well with gradual longterm problems. They deal with crises. And we dont have a crisis right now so its very today say im in favor of tax reform but oh, i mean all these little details. Or im in favor of longterm deficit reduction but no, i dont want to reduce benefits or raise taxes. So its apple pie to say im in favor of tax reform and im in favor of fiscal balance. But then any of the details which are painful, because change is hard, theres a natural tendency to just delay because you are not forced to deal with it right now. You know there is good evidence for it and good evidence on the other side. In the reagan years. Social security was about to run out of money. And they agreed that with a delay they would start raising the retirement age and that